Recently there has been a uptick in clients requesting us to send documents to third parties, who most often are lenders. In addition, since most of our clients are self employed, banks also ask for self employment verification letters from our CPA firm. Often the mortgage broker or bank officer says things like, “We won’t be able to approve the loan without your CPA’s letter” or similar statements to our clients, implying that if we do not cooperate the client’s potential outcome is zero.
It is important to recognize exactly what is going here because it runs contrary to law. Regulation Z requires banks and lenders to obtain third party communication. From the bank’s perspective, there is no better source than the CPA as the go to person. The statement “We won’t close without the CPA letter” is not only false [banks will close loans without a CPA comfort letter as a matter of fact], but the implication of such a statement is that the lender is relying materially on the CPA letter to accept the loan.
The lender’s tone often puts the CPA at odds with the client and also puts the CPA firm at risk of being drawn into a suit should the loan not perform. The AICPA has made it clear that a CPA may not release letters of assurance on a client if the engagement was a non-assurance engagement:
“Tax return preparation is not an assurance engagement; neither is write-up of client’s records, consulting or compilation statements. In fact, the agreement all clients sign for taxes and write-up clearly state the work we are doing isn’t a review or audit that would attribute professional assurances to the numbers.”
We have been advised by our insurance company not to write third party verification letters. For the most part, we do not write them. After several public discussions on this topic with our carrier and other CPA colleagues, the general consensus is that writing the letter takes on inherent risks. Third party letters can be designed to mitigate a CPA firm’s exposure to being at fault for a non-performing loan, but they do not stop the lender from dragging a CPA firm into court even if the CPA firm isn’t liable. As I write this, it almost seems strange that a CPA firm confirming a client is self employed or made ‘x’ number of dollars last year could make them, in reality, a co-signer to a loan. It seems ridiculous except for the evidence.
Our CPA firm has never been drawn into a non-performing loan circumstance and we’d like to keep it that way. When it comes down to who should you listen to, we all should follow our gut instinct. If you have special circumstances we certainly will listen and do our best to help our clients. My gut reaction to most third party letter requests is not affirmative.changes in staff, such as hiring a new employee.